The eurozone’s central bankers have left interest rates unchanged at their lowest levels on record and kept their commitment to do more should growth disappoint, in a decision that marks the end of a strong year for the economy of the single currency area.
…The central bank reiterated that it “stands ready” to increase the size of its bond-buying programme — dubbed quantitative easing — in what now seems the unlikely event that the recovery will veer off track. Interest rates would remain on hold until “well past” the end of QE.
The European Central Bank will extend its bond-buying scheme until at least September next year and possibly beyond to keep the eurozone recovery on track but will halve its rate of purchases to €30bn a month.
…The ECB struck a dovish tone, saying it stood ready to extend QE beyond September or even raise the level of monthly purchases should conditions worsen again. It also stuck to its line about keeping rates lower until well after it stops its bond purchases.
Mario Draghi, ECB president, said the changes announced on Thursday did not amount to a “tapering” of QE but a “down size” to a programme that remained “open-ended”.
Eurozone inflation rose at an annual rate of 1.5 per cent cent in September, missing economists’ forecasts and leaving the ECB with a dilemma as it weighs whether the economy is strong enough for it to roll back its bond-buying programme.
PG View: I’m sure, here too this is transitory. But keep in mind, weak inflation has been “transitory” for nearly two-decades in Japan, despite massive monetary accommodations.
Mauldin Economics/John Mauldin/09-27-17
When is a mystery not a mystery? When Janet Yellen is puzzling over a lack of inflation, that’s when. So say Brian Wesbury, chief economist, and Robert Stein, deputy chief economist of First Trust, in today’s Outside the Box. The bottom line: QE didn’t work, and Janet knew it was unlikely to work, from the start.
…So forgive us for asking, but after unprecedented expansion of banking reserves and the Fed balance sheet, with little inflation, is it really a “mystery?” Or, is it proof of what we believed all along: QE didn’t work?
…instead of boosting Milton Friedman’s key money number (M2), the excess monetary base growth went into “excess reserves” – money the banks hold as deposits, but don’t lend out. Money in the warehouse (or in this case, credits on a computer) doesn’t boost demand! This is why real GDP and inflation (nominal GDP) never accelerated in line with monetary base growth.
Reuters/Francesco Canepa & Balazs Koranyi/09-19-17
European Central Bank policymakers disagree on whether to set a definitive end-date for their money-printing program when they meet in October, raising the chance that they will keep open at least the option of prolonging it again, six sources told Reuters.
A stubbornly strong euro, with its dampening effect on inflation, is driving a rift among ECB policymakers, the sources on the ECB’s Governing Council with direct knowledge of its thinking said.
…“The strength of the euro is the number one problem,” one of the sources said.
PG View: Some see euro strength not so much as evidence that the European economy is on firmer ground, but more that the U.S. and UK economies are weakening.